Transcript Mike`s Bikes

Introduction to Mike’s Bikes
Topics Covered in This Chapter:
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Introduction
Introductory Economics
Marketing and Sales
Operations
Finance
Differences between Single Player & Multi-Player
Mike’s Bikes Reports
Mikes Bikes has been an integral part of the BUSN 70 class since its inception. This is a very real-to-life
simulation that integrates all of the course’s concepts and allows students to demonstrate their mastery.
As in the world of business, the goal is to maximize the value of the firm. The firm value depends on the
discounted stream of profits.
Profits = Revenues - Costs.
Revenues depends on product mix, pricing, distribution channels, advertising, etc. It is the result of an
interconnected system of business decisions that interact with customers, the market, the economy, and
the competition. Cost depend on many factors -- product design, production capacity, learning curves,
quality standards, etc.
Mikes Bikes teaches you the complexities and interactions of a multiplicity of variables which effect the
firm’s value. Business 70 requires this simulation as one way to prepare students for the realities of
business.
Credits: The Leavey School of Business thanks Andrew Abdalla and Samuel Holt, two undergraduates,
for their devotion to the Mikes Bikes simulation. They wrote this chapter and pioneered the evening
laboratories
Why does SCU use Mike’s Bikes? Here’s a hint, it’s
more than just a game…
Mike’s Bikes is an online business simulation tool used by business schools around the world to engrain
undergraduate and graduate students with lessons about managing an integrated business across various
business functions. While it certainly can play like a game, and to many it can be only that, Mike’s Bikes
is primarily an educational tool used to show the user how academic concepts apply to “real-world”
business operations, and more importantly how decision making within a firm in a particular department
can affect other business functions of the firm.
Our goal with this chapter is not to postulate academic theories of proper management, nor to solely
provide a user manual. You will take many classes during your four years at SCU which will cover
theories in your field, and SmartSims has already created a wonderful user manual. Our objective is to
connect the “game” to introductory business concepts, helping you to better understand not only how to
succeed in the game (which will benefit your grade), but also helping you to solidify your mastery of the
concepts taught in Business 70 which will be foundational for the rest of your education in the Leavey
School of Business.
To start off, we want to discuss the types of decisions that the simulation allows the user to make, and
why those decisions are significant. In general, the user in our version of Mike’s Bikes is enabled to
make high-level “management decisions.” You can set prices, production quantities, production capacity,
segment choice, product improvement, marketing channels and budgets, quality and efficiency control,
financing decisions, and supply chain. Each of these decisions are integral to the success of any
company, and so it is important to understand how to make proper decisions and how those decisions
impact the rest of the firm.
As you begin in Single Player, the simulation will gradually give you more managerial decision-making
power by “promoting” you within the company, so as not to overwhelm you with the complexity of the
decisions while you are first learning. Throughout this chapter, we will walk you through the decisions in
the order they are presented to you. Later sections will discuss items such as the differences between
Single Player and Multi-Player (both required in your class), and which reports are available to assist
with your decision making.
While it is our sincere hope to help you to understand not only the simulation, but also your class
material through this chapter, we must emphasize that this chapter is only one of several resources
available to you. To fully understand the material and the simulation, we encourage you to read the
Mike’s Bikes Player’s Manual, make use of your Peer Educator (if you have one) and out-of-class
assistance, study the Reports available to you in the simulation, and read the Year Ahead bulletin
presented to you with each rollover. Making use of all of these resources together is the best way to
succeed with Mike’s Bikes.
Economics 101
Introduction
Before we start discussing decisions you will face in the simulation, we think it will be
worthwhile to review some introductory economic concepts that relate directly to some of the
vocabulary we will be using. We know that many of you are currently enrolled in Econ 1 or may
have already taken it, but be sure to at least skim this section to make sure you know how to
relate your Econ knowledge to the simulation. Two concepts are fundamentally important to
understanding the simulation, and without them we know you will be completely lost when
figuring out how to make decisions.
Supply, Demand, Equilibrium
The first things you need to understand about an economy are the basic laws of supply and
demand. We will give you the short version here. Suppliers, meaning companies which produce
final goods and services, are willing to produce more of a good as the price of that good
increases. Buyers who demand the good are willing to purchase more of the good as the price of
that good decreases. In a perfectly competitive economy, prices are not set by individual players,
but are driven by these laws.
Equilibrium
The price at which the
number of products that
businesses are willing
to supply equals the
amount of products that
consumers are willing
to buy at a specific
point in time.
A firm which prices its goods too high will end up with a surplus due to lack of demand, and
will end up with a shortage if it prices them below market value. Because of this relationship, a
graph demonstrating price as dependent of quantity will show a downward sloping demand
curve and upward sloping supply curve. The intersection of these graphs is known as
equilibrium.
Understanding this
relationship is extremely
important, because in the
game and in the real-world,
both a shortage and surplus of
your firm’s goods can produce
detrimental effects. This will
factor into your decisions of
production capacity, analyzing
inventory, determining
production for the year ahead,
and price setting. This supply
and demand model is only
completely valid for perfectly
competitive markets, in which
individual firms essentially
have no control over the price.
Figure A:
Understanding Supply & Demand
Elasticity
Elasticity
The degree to which
individuals (consumers)
change their demand in
response to price,
income changes, or
other factors. Also
called sensitivity.
The second concept is elasticity, which in our case will refer to the degree to which individuals
(consumers) change their demand in response to price, income changes, or other factors. In the
simulation, elasticity is usually referred to as sensitivity. Though you will never need to
mathematically derive the formula in the simulation, it is sufficient to say that when demand for
a good is highly price elastic, there is a high sensitivity to the good’s price. A good which is
perfectly price inelastic is one which at any price level, the same amount of the good is always
demanded (all other factors held equal). A good which is perfectly price elastic, on the other
hand, is one which is only demanded at a specific price level.
High Elasticity
Low Elasticity
Figures B &C:
High and Low Elasticity
Demand for a good which has High Price Elasticity can change wildly even with the smallest
changes to prices. Conversely, a good which has Low Price Elasticity can absorb such changes
with little to no effect on Demand. The overall sensitivity of demand for any product depends
not just on characteristics of the consumer but also on the extent and nature of the competition as
you will experience in multi–player Mikes Bikes.
Elasticity sounds complicated, and in advanced economics it can be, so why are we talking
about it? In the Market Information Report, located under the Key Reports [fig. D] tab,
you will see reference to a table of decisions and the sensitivity to that decision based on the
product. When the table says that buyers of Kid’s bikes have High sensitivity to prices, you
need to know what that means in order to make an informed decision about setting the price
of your Kid’s Bike, should you choose to produce one.
Figure D:
Market
Information
Report
Marketing and Sales
IntroductionHigh/Low
Market Segmentation
A strategy whereby a
firm divides the total
market into groups of
people who have
relatively similar
product needs
Marketing is one of the more critical areas of understanding in Mike’s Bikes. It will require you
to understand and execute market segmentation, tailor strategies towards multiple target
markets, set budgets, manage your distribution channel, and more. With so many decisions to
make, all interconnected, it is natural to find yourself asking, where do I start? The single
decision you can make that will govern the context in which you make the rest of your
Marketing decisions is to set your pricing strategy, so we recommend you start there.
Target Market
A specific group of
consumers on whose
needs and wants a
company focuses its
marketing efforts
Setting a Pricing Strategy
Pricing Strategy
Strategic decision
setting a relationship
between the production
quantity and price of a
good.
There are three main pricing strategies to use in Mike’s Bikes, all of which are equally effective
if implemented properly: High price / Low volume, Mid price / Mid volume, and Low price /
High volume. As you are first learning the simulation, it is wise to experiment with each of these
strategies and determine which works best for you before selecting one. It is important to know
that these are the only three strategies that you can use, which makes sense if you recall our brief
intro to supply and demand: prices and quantity of goods demanded have an inverse relationship.
Volume
Helpful Hint:
Remember that demand
for a good tends to be
lower when the good
has a higher price.
Hence, “High Price /
Low Volume”
High/Low
Price
Medium/Low
High/Medium
High/High
Unrealistic
Unrealistic
Medium/Medium
Medium/High
Unprofitable
Unrealistic
Low/Low
Low/Medium
Unprofitable
Unprofitable
Low/High
Figure E: Pricing Strategies
Quality
Refers to the
satisfaction experienced
by customers from a
product and is an
important determinant
of customer demand.
Determining your strategy is a process you should undertake with fresh eyes after each rollover,
taking into consideration the new competitive landscape that comes with it. When choosing a
strategy, first take a look at the Market Information and identify key data related to production
quantity and pricing. How many bikes is the market looking to buy, and what is my share of that
market? How sensitive is the target market to prices and quality?
If the market size is small, with low sensitivity to prices, an appropriate strategy would likely be
to charge a high price and expect a lower volume of sales. Conversely, it would be hard to
command an above average price in a large, price-sensitive market.
Once you have made a decision about your pricing strategy, you are ready to set your price,
determine production, and allocate your marketing budget.
Price, Budgeting, and Quantity
How do you know what price is the right price to set? Can you be sure that you are actually
producing the right amount of bikes? How much advertising do you need to get the appropriate
awareness in your target market? You cannot know for sure that the decisions you are making
are the perfect decisions, but by following a repeatable process, you can make excellent
informed decisions that get you close.
Price
In order to determine the appropriate price for any bike, you need to consider a few key pieces of
data, all available to you in the Market Information report. The simulation has already completed
market segmentation for you and compiled the relevant data for each segment. Combine the
following information with Price Sensitivity (also in the Market Information Report) to make
your final decision.
Figure F:
Market Information- Segment Size and Price Range
A few tips about setting a price:
1. Avoid the extremes. Even for High and Low volume strategies, we do not advise you to set
your price at the minimum and maximum price levels. It’s a good rule of thumb to stick to
within +/- 10% of the Recommended price.
2. Keep your prices competitive! The terms “Low Price”, “Medium Price”, and “High Price”
mean nothing except in relation to the competitive market you are operating in.
3. High sensitivity to price means that a proportionately small price increase will hurt your
sales, but a small decrease in price could be rewarding. Low sensitivity, conversely, means
that you might be able to get away with incremental increases.
Budgeting
Setting the correct marketing budget is crucial not only for generating the necessary amount of
sales to remain competitive and deliver Shareholder Value, but also for managing your
company’s cash.
There are two main ways to promote your bikes: Advertising and Public Relations (PR). These
different methods are effective in their own right depending on the target Segment. Refer to the
Market Information Report to determine each Segment’s sensitivity to Advertising and PR. The
first budgeting decision to make is to determine which area you are focusing on.
Next you must determine which media channels to target, and how much of your budget to
allocate to each channel: Television, Internet, and Magazines. Again, refer to the Market
Information Report. The following table provides information about the proportion of each
segment which can be reached in each media channel. Note that the numbers always add to more
than 100%, to account for individual consumers being active viewers in multiple channels.
Figure G:
Market Information- Media Channels
Immediately, this table can help you determine the basic proportional distribution of your budget
by channel. However, the best use of your dollars may differ from what you see here, which is
why the second chart is included. Figure H, also found in the Market Information Report, tells
you the proportion of the audience for a particular media channel that can be reached per dollar
spent.
Awareness:
A measure of how
many consumers in that
segment are aware of
your product due to
your corporate brand
advertising and product
advertising.
You can optimize your
budget by following a few
Figure H:
Market Information- Reach by Media
simple steps. First, set a
target Awareness level for
your segment, and use the
Reach by Media graph to
find out how much it would
cost to get that awareness in
all channels. Then, rather
than trying to get the same
level of awareness from
each channel, adjust your
targets to include an
optimal blend of most
awareness per dollar spent and the proportion of your segment which can be reached through
that channel. Multiply the proportion of a segment which can be reached in a particular channel
by the target awareness of that particular channel. Sum the three multiples to get a weighted
average Awareness estimate, which is a more efficient use of money than attempting to get a flat
awareness across all channels. Ex: (using Mountain Segment) If you spend $1,000,000 in each
channel, you can get an awareness of approximately .329. Alternatively, you could spend
approximately $250,000 less in aggregate and achieve the same awareness. Caveat on all these
tables – Mikes bikes changes the simulation on a regular basis, so you need to rely on YOUR
version.
Quantity
Note in this section we are strictly talking about the quantity of bikes produced. Managing your
capacity, so that you are able to produce the desired amount of bikes, is discussed in a later
section. Of all your decisions, the quantity one is the least scientific.
Refer to Figure F above. To start estimating your sales, from which you derive production, you
need to determine your market share. The estimated total size of the segment is given in the
Market Information report, shown in Figure F. Divide this number by the number of firms in
your “world” (for Single Player, this would be 2- your firm and the computer playing against
you). Ex: (using the Mountain Bike Segment), we would take 45,000/2 = 22,500.
From here, there are a few main approaches you can take.
Capture the Market
1. Using the Market Summary report, you can determine how many bikes in your world were
sold in each segment, and compare that number to the Estimated Potential Market Size. The
difference would be the untapped market. Ex: 45,000 – 36,000 = 9,000
2. Take this difference and divide it by the
number of firms in your “world” to calculate
your share of the untapped market.
Ex: 9,000 / 2 = 4,500
3. Add this number to your sales quantity from
the last year, subtracting any inventory
(locate your inventory statistics on the
Products- Sales, Margin, Production
Figure I:
Products- Sales, Margin, Production Report: Sales
Report).
Ex: 4,500 + 18,000 – inventory = production
Note that this strategy for estimating your production assumes that you will capture 100% of
your share of untapped market. Without more detailed data, this is just as reasonable of an
assumption as any other. However, know that to realize this goal, you will have to adjust your
budget accordingly in order to generate the necessary awareness for that level of demand.
Growing on a Budget
You can also estimate your sales and set production based on your marketing budget. This is
useful when the market is fully tapped and you are trying to capture market share from a
competitor, or if you are working within cash constraints. You can make estimates of anticipated
Awareness based on the table and graph in the Market Information report which provide data on
advertising reach and viewership. Determining the anticipated Awareness and comparing it to
prior awareness can help you to estimate a proportional increase in sales.
Product Development
& New Products are
discussed later,
Other Factors
No matter how you decide to estimate your sales, be sure to consider one-time factors. Events in
the simulation such as product development (either by you or a competitor), dramatic market
price changes, and new product launches can disrupt the status quo and cause demand surges in
favor of a particular firm’s bike.
Branding and Distribution
Branding
Benefits of Branding:
“Having high brand
awareness makes
consumers more aware
of your company and
more receptive to your
product advertising…
maintaining a constant
level of branding
expenditure will slowly
improve your brand
awareness over time,
and also increase your
individual product
awareness.”
Branding in Mike’s Bikes is a part of your advertising budget that is not directed at a particular
segment, but instead is intended to further your corporate brand image. Your branding
expenditure therefore can benefit the Awareness of each of your segments equally. This makes it
a powerful, important tool. When you gain the ability to make a decision regarding your
company’s branding budget, the default expenditure will be $250,000. While it is nearly
impossible to measure the direct impact of branding dollars on segment awareness, we strongly
encourage students to treat Branding as a priority expense because of its unique compounding
ability to influence awareness across segments.
Distribution
As you would in the real world, you will need to utilize distribution channels in Mike’s Bikes.
There are three categories of distribution as defined by Mike’s Bikes: Bike Shops, Sports Stores,
and Discount Stores. Each channel caters to a different type of consumer, and thus targets
different styles of bike. For the most part, Bike Shops stock only the Road and Mountain Bikes,
because they are smaller, more specialized shops that focus on providing service to their highend clients. Bike shops stock more expensive bikes than the other two, which attracts a crowd
more drawn to luxury and highly specialized bikes. Sports stores focus on the mountain bike
segment, which caters to a more active and adventurous crowd that is still willing to spend
money on the right bike. Mountain Bikes must have the latest specifications and technology,
because everything helps provide an edge when on the mountain. Lastly, Discount Stores cater
almost exclusively to the Youth Bike segment. This segment must appeal to children by keeping
current with the latest trends, and by maintaining a price low enough to attract their parents.
Figure J:
Distribution Summary
Report- Segment
Shopping Habits
The distribution decisions you can make are setting the margin percentage and whether or not to
give extra support to each store. Margins are one of the most potent weapons you have in
Mike’s Bikes. With margin percentage, you can effectively increase or decrease the number of
stores carrying your bike, and have a surefire way to increase profitability should the need arise.
The margin that you input in the decision screen is the retailer’s share of the sale price, so be
judicious with how much you give. Every extra percent that you give to your retailers is one less
percent that goes to your bottom line. Conversely, you can view it as an investment in
distribution which will pay off in future rollovers with increased sales. Be careful not to slash
margins for a particular distribution channel, because that channel may be critical to your
success in launching a new product down the road. Use your margins to align your distribution
with your targeted segments.
Figure K:
Distribution Decisions
What in the world in Extra Support? At its most basic, Extra Support is a cash payment to
stores, to promote either an expansion of the number of stores carrying your bike, or to fund a
display that can be placed in the store itself. The number you input, is your total contribution to
that segment as a whole. For example, if you give $1,000 in Extra Support to the Bike Shops, of
which 50 stores are stocking your bike, you will be giving $20 to each store. Though the
numbers may not seem significant, small numbers may have profound impacts on sales and
profits.
Capacity & Product Management
Introduction
Failing to appropriately manage your production capacity can cripple your ability to grow, or can
be extremely costly. It is important to know how Capacity is measured, what is factored into it,
how it is used, and ultimately how its use can be optimized. This section also covers launching
new bikes and modifying existing bikes for cost savings and increased demand.
Capacity
The Capacity module of the simulation looks relatively simple, but the decisions you make here
have direct impacts on the success of your company. We’ll start by defining a few terms:
Standard Capacity Unit (SCU), Wastage, and Idle. These are all related to your company’s
ability to optimize its manufacturing, and thereby increase profits, which will drive shareholder
value.
Standard Capacity Unit (SCU): A consolidated measure meant to include factory square
footage, machinery, and labor used to measure the combined quantity of these inputs
required to produce one bike.
Wastage: Capacity which is currently being used in the production process that has no
direct benefit to the final product. Also known as inefficiency. This could be due to
machine downtime, rework, raw materials stockout, etc.
Idle: Excess Capacity which is currently unused and may be used for increases in
production.
Figure L:
Capacity Planner
Idle Capacity does not cost you anything, but it does cost to add capacity. If you look carefully,
it costs twice as much to buy capacity than you can generate by selling excess, meaning that it is
extremely costly to sell capacity early when it may be needed in the future. After the fourth
rollover, you will be allowed to add bikes to your product mix, and those bikes will require
capacity to produce. Even if unused for a few rollovers, it is smart to retain idle capacity so that
it is available for future production.
Figure M:
Efficiency
Wastage, on the other hand, is a negative measure which you should attempt to improve. It
represents capacity that is being used, but is used towards tasks that do not create new products.
Wastage can be improved by increasing your Efficiency expenditure, which in the real world
would be put towards production process optimization, employee training, and other items that
enable you to produce more bikes with the same amount of resources. Increasing efficiency is
one way to increase production without having to buy more capacity if you eliminate Idle.
Here’s a few quick tips about Efficiency and Wastage:
1. Increasing Capacity (buying SCUs) will increase the proportion
of wastage. Increasing your Efficiency expense can offset the
inefficiencies of larger scale production.
2. Efficiency compounds: assuming the amount of SCUs does not
increase, your production efficiency rating should increase
without any change in your efficiency expense.
3. Efficiency has nothing to do with consumer preferences,
marketing, sales, or your target market. Efficiency is all about
optimizing your production process for profit maximization.
Capacity
Efficiency
As a part of the decisions available in Capacity Planning, students can increase or decrease their
spending on quality. Quality, measured as a percentage rating, ultimately relates to customer
satisfaction from the product, and your product’s quality rating is an important determinant of
customer demand. The more money you spend, the higher the quality level, thus your products
receive higher satisfaction ratings, likely due to fewer defective products. Defects affect the
production process by taking away from producing bikes. If 10 bikes are returned because they
did not work, the production floor employees must spend their time reworking the defective
bikes instead of producing new, full-price bikes. A significant amount of money is lost with
each returned product. It is best to find a good balance between spending reasonably, and
maintaining sufficient quality.
Depending on the bike segments you choose to enter, the customers have different quality
requirements. Road bikes require the highest quality of any bike: because they are paying a
premium, you must ensure they receive high quality bikes. Mountain and Youth bike customers
have decreasing requisites for quality. If you are in more than one segment, you must determine
where to set quality as a compromise between the segments while remaining within your budget.
It will not cause problems to have above-average quality, but will be detrimental to be below the
market. While the Market Information report specifies a target quality rating, you should adjust
your quality based on the competitive environment.
Figure N:
Quality
The effectiveness of your quality expenditure works in much the same way as efficiency: it
compounds, meaning that if you do not change your quality expense from year-to-year (SCUs
held equal), your quality rating will increase. Quality also suffers from expanding your overall
capacity, and you should consider this if you plan expansion with a quality-sensitive product in
your product line.
Product Management
Launching a New Product
In rollover four, one is able to expand your firm’s product line by adding either a Youth bike or
a Road bike. Launching either product can prove equally successful or catastrophic. The success
of a new product is dependent on a combination of factor. Competitive actions are particularly
important. If all of your competition decides to produce a Road bike when you decided to
produce a Youth bike, you will own the Youth market initially. However, if everyone in your
“world” decides to produce a Youth bike, including you, then you will face stiff competition. In
this section, our goal is to give you the analytical tools you need to successfully launch a new
product amid this competitive environment.
The most important thing for you to remember is that the decisions you make with a new
product launch are no different from the ones you have been making for the past three rollovers
with your existing Mountain bike. The only difference is the context of the decisions, and that
you are starting from scratch, without the benefit of historical decisions and results as a guide.
Read the “Year Ahead” bulletin at the start of your fourth rollover for helpful hints from
Smartsims about launching a new product.
Helpful Hint
Refer to our earlier
sections about
Distribution, Capacity,
and Marketing
Before you launch a new product, consider looking at your current distribution channels and
which bike lends itself best to your distribution pattern. While this is not the perfect decision
making guide, it can tell you how likely your product is to reach your target market. In the year
you launch your new product, it does not hurt to give some extra distribution channel support or
boost retailer margins for the channel which will sell the majority of your new bike.
Also factoring into your decision about which bike you should produce is your Capacity, for a
couple of reasons. First, consider that each Segment requires different SCUs to build one bike,
so if you are operating at full capacity and it would be cost prohibitive to undertake large
expansion, consider going for a bike that requires less SCUs per unit (of course, you will also
have to consider how many bikes you want to produce in making this decision). Secondly, the
different Segments have varying sensitivities to Quality. Compare your Quality index to that of
your competitors: if you are at the lower end, consider producing a bike with low sensitivity to
quality.
Financing New Product Launches
There are three main areas of investment required to launch a new product: R&D expense, new
product advertising, and capacity. Development of any new bike will cost $1,000,000 in R&D
expense, plus you will have to factor in that you need to create a new advertising budget for your
product (somewhere above $1,000,000), and you may need to buy capacity or invest heavily in
Efficiency in order to produce the necessary amount of bikes needed to meet forecasted demand.
Creating a new product is expensive, but almost always worth the cost. We bring this up because
it is important for you to consider how you are financing the product launch: do you have the
necessary cash on hand, do you need to issue debt, or do you need to cut back other ongoing
expenses to free up cash? Always consider the immediate financial impact of launching a new
product before you move forward.
Figure O:
New Product
Once you have picked a bike to produce, you need to set a pricing strategy. Remember that your
pricing strategy for your new bike is completely separate from that of your other bike(s). For
one, you can use High Price / Low Volume, and for the other you can use Low Price / High
Volume, and they can be equally successful. By the time you are creating a new product, you
should have a sense for which pricing strategy works best for you. Follow the same guidelines
we discussed in our section on setting prices earlier in this chapter for setting the price of your
new bike.
Likewise, determining your production quantity is similar to the processes discussed earlier, with
a couple of small considerations. Because you cannot guarantee that all of your competitors will
produce the same new bike as you, consider factoring into your forecast that at least one to two
other firms will enter the other segment, and then adjust your share of the market for the fact that
the market will likely not be 100% saturated within the first year.
The last component, of course, is allocating your marketing budget. How much should you
spend? Where should you spend it? It might feel like you have to go through some special
process because this is a new bike, where in fact you can follow the exact same budgeting steps
as you did with your Mountain segment. Use the data in the Market Information report to
determine whether to primarily use PR or Advertising, and within those which channels to spend
it. Start by setting a target awareness level and work backwards to an optimal budget.
Once you have created a product, determined your price, dedicated capacity towards production
of your product, and allocated your marketing budget, you have launched a new product.
Modifying an Existing Product
Adding new products to your product line is not the only way to make sure you keep pace with
market demand. An alternative option is to develop or modify an existing product for the onetime cost of $1,000,000. Developing the bike is essentially altering one of two factors:
production cost or its technology/looks.
Helpful Hint
Be careful of modifying
an existing bike if you
have large amounts of
inventory from previous
years. When you
upgrade a product
(with either Cost or
Spec), any inventory
from the previous
version is no longer
able to be sold,
meaning that the cost of
producing those bikes
is not recoverable. If
you can afford to wait
one rollover, consider
reducing production of
your unmodified bike in
order to sell-off your
inventory before
upgrading.
Cost is exactly as it sounds. For $1,000,000, you can reduce the per unit cost of the bike by a
fixed amount. While the million dollars scares most people, there is an easy test to determine
whether or not the investment will produce positive or negative returns.
Multiplying the per-unit cost savings
by the number of units you intend to
produce the following year will give
you the first year return of the
investment. If this number is greater
than $1,000,000 the investment will
produce a positive return in the first
year, and should be considered an
excellent investment. However,
students should be aware of the longrun cost savings as well. Because the
million dollars is a one time
investment, and the per-unit cost
savings carry on in perpetuity, the
number of periods until the simulation
ends should taken into consideration
as well. If at any point before the last
Figure P:
rollover, the investment produces a
Product Development- Cost
positive result, you should invest.
The second option, specification upgrade, is trickier to gauge. With this development option,
you have the opportunity to upgrade the technology and style, or look, of the bike. This also
costs $1,000,000, but there is no way to directly measure its effect on sales or revenue. You
should survey the outlook of the market. If you are consistently below the rest of the market in
the Product Specs and Awareness categories in the Market Summary Report, you should
invest in the specification upgrade. Notice how the blue dot in the figure is closer to the center of
market demand than your current bike.
Upgrading your bike’s specs
makes your bike more attractive to
the market. While your bike’s
current Spec is listed on the
Market Summary Report, you can
find the optimal Spec on the
Market Information Report.
You also have the option of doing
both upgrades for $2,000,000.
Figure Q:
Product Development- Spec
Finance
Managing your finances in Mike’s Bikes is critical to being able to raise your Shareholder
Value. In this section, we will explain the key areas of finance to which you need to pay
attention, such as cash flow, as well as the two primary methods for financing expenditures,
equity and debt, and the advantages and disadvantages of each.
Cash flow
Every expenditure that a company makes must be financed through one of three sources: cashon-hand, debt, or equity. Cash-on-hand is self-explanatory, and essentially refers to the company
spending cash it already possesses. It requires no external interaction, and therefore no additional
cost to the company. Because of these advantages, it is easy to see that spending cash is
preferred to borrowing or issuing equity. However, most companies will not have the required
cash-on-hand to finance expensive expansion projects, such as adding capacity or launching a
new product. Optimizing your recurring expenses to your available cash-on-hand and anticipated
large unexpected expenses will help you build a cash stockpile that will enable you to pay
dividends and internally finance expansion. Reckless spending and cash depletion, however, will
force you to externally finance operations in order to compete with the market.
So how can you keep an eye on your cash? The first option is to look at the Financial
Management Overview screen, where you can see your beginning and ending cash given your
decisions. On this report, Cash flow is reported in two main decision-making categories:
Financial Decisions and Operational Decisions. Operational Decisions are those directly related
to your company’s selling, production, and development activities. Financial Decisions, on the
other hand, are decisions which involve external financing (issuing debt, paying down debt,
paying dividends, issuing equity, or buying shares). This report also shows you a figure called
Available Overdraft.
Overdraft is automatic debt
financing that will kick-in if you
spend more than your cash-onhand. Overdraft does not require
your consent, so it is important to
keep track of your expenses. It
functions like a line of credit with
the bank. While it is helpful to
have access to these funds, know
that they do carry an interest rate
because Overdraft is debt.
Additional information about
Overdraft can be found in the
Other Information report.
Figure R:
Financial Management Overview
The second area, where you can view a more detailed breakdown of your cash flow, is the Pro
Forma Cashflow Report. This report gives you a picture of your decisions for the current
rollover, so it is helpful to consult here before you rollover to make sure that your decisions do
not negatively impact your Cash flow goals. Additionally, you can view historical Cash flow
statements to check performance by viewing the Cashflow Statement or Cashflow Statement
History reports under Firm Results. Looking at your Cash flow can help you to see where you
can save money. While you have direct control each year over decisions such as marketing
expenses and development costs, the Cash flow statements also show you passive flows, such as
interest earned on cash in the bank and interest expenses on your debt balance. Understanding
the composite picture of your company’s cash position and properly managing cash flows
separates the best performers from the pack.
Equity
Managing equity involves paying dividends to shareholders and managing shares outstanding in
order to maximize shareholder value. It can also be used as a method of raising cash. The goal
of Mike’s Bikes is to maximize shareholder value, and in turn to maximize the value of each
individual share. Each company begins with 1,000,000 shares outstanding in the market. If you
choose to raise cash by issuing equity, it means that you are increasing shares outstanding.
Remember that shareholder value is the market capitalization of the company divided by the
number of shares outstanding. By issuing equity, you are raising the denominator, which will
either negatively impact shareholder value or dampen the effects of increased value.
The inverse is also true, which is where equity can be a powerful shareholder value management
tool. Unless your professor specifies otherwise, you are allowed to buy-back up to 100,000
shares. Buying back shares is a common practice among publicly traded companies because it
reduces the number of company shares outstanding in the market, which therefore raises the
value of each individual share. Some analysts argue that, in real life, this does not have the
desired effect on the share value as investors discount the impact once the company initiates the
buyback.
Figure S:
Equity
Always consider your cash position before buying back shares. Our advice for the simulation is
to only buy-back shares using cash-on-hand, but that should only be done if you have excess
cash that cannot be used for further product improvement or operating expenses. This is just as
true in the real world as it is in Mikes bikes. Note that since your goal is to always raise your
shareholder value and therefore your share price, it is cheaper to buy back shares earlier in the
simulation than later. You must weigh this consideration against the need to stockpile cash early
on.
Dividends
Dividends are another powerful tool for raising shareholder value. Dividends are direct cash
payments to shareholders on a per share basis, returning the company’s earnings to its owners.
Dividends, unless your professor specifies otherwise, are capped at 10% of the prior year’s
earnings. Since they are paid on a per share basis, look at your prior year’s earnings per share,
shown on the Industry Benchmark report. Since dividends are a cash payment, just like share
buybacks, make sure to check your cash position before paying a dividend, and prioritize
operating decisions before making dividend payments. Dividends per share are added directly to
the share price to calculate your final shareholder value, and are compounded. As an example, if
your share price is $15 and for two consecutive years you paid dividends of $0.50/share, then
shareholder value will be $16. Therefore, it is advantageous to maximize dividend payments
each year when you can afford them.
Debt
Issuing debt is a method for raising cash quickly that does not directly impact shareholder value,
though the debt/equity ratio is an indirect factor. Each company in the simulation begins with
$1,000,000 in debt at an 8% interest rate. This means that each rollover, your company will incur
an $80,000 interest expense to service that debt. Since Mike’s Bikes multiplayer only lasts for 8
rollovers, notice that your total interest expense over 8 years will be $640,000 (assuming no debt
increase). Is it worth it, then, to sacrifice $1,000,000 in cash to pay off the debt, if you could
save $360,000 by keeping the debt and paying the interest? There is no right answer to the
question, and either approach can work. We will leave the question at this: if your company has
more cash than you know what to do with, it does not hurt to eliminate your debt, but if your
company needs cash reserves, it is better to pay the relatively minor annual interest.
Figure T:
Debt
Key Differences Between Single
Player and Multi-Player
How should Single and Multi-Player Mike’s Bikes be approached, and should they be
approached differently?
Both the Single and Multi-player versions of the simulation bring unique and interesting new
opportunities. You will first be introduced to Single Player, and we strongly recommend you
play and test the functionality of the simulation through this medium. In Single Player, you will
be playing against the computer, which makes intelligent, but not necessarily optimized,
business decisions. Single Player is designed to give you the look and feel of the simulation,
while giving you the freedom to test strategies and fashion your game plan for Multiplayer. One of the nicer features of Single Player is that you can freely undo a rollover if you
make a mistake. This also lends itself nicely to fine-tuning your Mike’s Bikes skills and
allowing you to see the impact of one decision on the rest of the simulation. Single Player is
your opportunity to make mistakes and learn the simulation by rolling over and rolling back to
your heart’s content. We strongly encourage you to take advantage of this, and continue testing
strategies in Single Player once the Multi-Player competition commences.
Moving from Single Player to Multi-player can be challenging. Not only will students be placed
into teams to run their company, but those who become familiar with the Single Player
experience will notice some small changes to the rollover functionality of the system. In MultiPlayer, individual teams cannot rollback or choose when to rollover. Rollovers are scheduled at
predetermined deadlines, so you have to make and input all decisions before that deadline. After
the deadline passes, all decisions are final.
The single largest difference between the Single and Multi-player simulations is that the
competitive landscape is vastly different. Instead of competing against one computer, you will be
competing against several other human teams. In multi-player, surveying reports to get a sense
of your competitors’ trajectory and decisions is critical to positioning yourself to succeed in that
environment. Remember that your awareness rating, product quality, distribution, and other
measures are only good or bad relative to the competition, so it is important to position yourself
within that context. You will have the opportunity to capitalize on your competitors’ human
error. You should know, however, they will return the favor.
Key Reports
There are 13 essential report. This section provides a very brief summary of what each report
can do for you. At a minimum you should use these reports when making your decisions, but
that is not to say that we did not leave an important report off of the list.
The Year Ahead
This report gives you a snapshot of what new decisions you will be able to make in the coming
year. It also gives you very valuable information regarding strategy for each decision, as well as
some educational information about what the decision means. This is one of the more important
reports and can be found at the top of left side each page. It should be referenced whenever you
are confused about the factors influencing a new decision. Be advised, The Year Ahead page
changes every rollover, and it is always current to the decisions you will be faced with for the
current period. It should be the first report you read before making any decisions.
Market Information
This is one of the most important reports. The Market Information page contains all of the preset simulation preferences which will guide the majority of your decisions throughout the
simulation, including price, marketing, quality and other decisions. When in doubt, check the
Market Information Report! It can tell you how to set your price, how to determine production
quantity, how to much to spend on branding, advertising, and PR, and what the preferences are
for each bike. This is the most useful report throughout the simulation. You would be, at best,
guessing on your decisions if you were not using this report to influence your thought
process. It should be used to test each decision, to make sure it is aligned with the simulations
pre-sets.
Market Summary- All Product Details
This report is found under the Key Reports tab. The Market Summary provides a side-by-side
comparison of each team’s bikes. They are compared in categories such as: sales, awareness,
quality, distribution, and price. When considering your decisions, you should look at this report
to adjust your strategy to fit the context of your specific world. If you picked a medium/medium
pricing/volume strategy, and wanted to set your price and production and $700 and 18,000 units
respectively, you would know generically that it is consistent with conventional wisdom. If
however, you have five other teams all in the price range of $700-710, you must adjust your
strategy to differentiate your team and product from the masses. In this scenario, it would make
more sense to set your price at $690, so as to undercut the competition, and steal market
share. This strategy is still well within the medium/medium constraints, but makes much more
sense for the specific situation. This report will provide you the context necessary to adjust your
strategy to your ever-changing world.
Products- Sales, Margin, Production
This report is also found under Key Reports. It tells you sales data about each of your products,
including data points such as Lost Sales (which means bikes you would have sold if you had
produced more), awareness of the product, inventory, and more. Consult this report for making
production decisions, as you want to get as close to zero inventory and lost sales as you can with
each rollover.
Industry Benchmark
This is also one of the most important reports in this simulation. This displays every team in the
world, and each respective shareholder value, share price, cash, spending on advertising, and
capacity in units. This serves as a direct market comparison for each whole company, much like
the Market Summary report did for individual products. This report should be consulted
throughout your decision making process. It is relevant to every decision you make.
Distribution Summary
This report is not available until the second rollover, when you are able to effect changes to the
Distribution and Branding page. It is available under the Key Reports tab. This report details
where the sales of each bikes are derived. For example, Road bikes are overwhelmingly sold in
the Bike Shops. It also gives the breakdown of the number of stores, how much support you are
providing to each store segment, and what the minimum and maximum levels of support are for
each segment. This report is largely informational, and should be used to make each distribution
decision.
Other Information
This report is located under the All Reports tab. It provides information about capacity
planning, and Finance. You should consult this report if you want information regarding
warehousing costs for excess bikes, the company tax rate, the overdraft limit, etc. The Other
Information Report is dynamic, changing every rollover to reflect your decisions from the last
period.
Multi-Firm Retailer Margins and Extra Support
This report is true to its name. It will show you the margins and extra support each company
team is giving to each store segment. You can find the report in the Distribution and Branding
tab, then clicking on Reports, and selecting Multi-Firm Retailer Margins and Extra Support.
Financial Management Overview
The Financial Management Overview can be found in the Financial Management tab. It is
presented as a Pro Forma Cash Flow Statement, with cash remaining from the previous period,
and a summary of your spending in the areas of Financial and Operational Decisions. This
report is where you go to see if you have enough money to implement your current decisions. It
also provides a snapshot of your overdraft (see Finance > Cash Flow for Overdraft
description). This report is crucial to any decision, as it gives you a real time look at how your
decision would affect your cash position. It further informs whether or not you will require
taking on additional debt to finance a new decision. This is one of the more important reports in
Mike’s Bikes, and should be used every rollover.
Pro Forma Cash Flow / Funds Available
These are two different reports found in the Financial Management tab. The Pro Forma Funds
Available report adds detail to the general Financial Management Overview. Think of it as an
abbreviated Cash Flow Report.
The Pro Forma Cash Flow Report is a full-fledged cash flow report. It shows you every expense
you incur, and every cash inflow to the company. This report allows you to see how each
decision affects your cash position. It gives you extreme detail, which in turn gives you the
ability to fine-tune your decisions. The Pro Forma Cash Flow Report is one of the most
important reports, and is one you should constantly consult.
Cashflow Statement
The Cashflow Statement is the fundamental report in Finance, and can be found in the All
Reports tab, by selecting Firm Results, then clicking the dropdown and selecting Cashflow
Statement. Each and every real-world decision is made with the Cashflow Statement in mind. It
begins with the cash remaining from the previous period. The report takes into consideration
only movements of cash. For example, an Accounts Receivable entry has no effect on cash, and
therefore is not included in the Cashflow Statement. It is common that a company purchases
materials or fixed assets on credit, which would show as a drain on income. This is a false
perception however, as no money has changed hands, which means the company can still
finance other decisions. The Cashflow Statement will equalize the net effects of that purchase
on the company’s financial stability. The Cashflow Statement will provide clarity, and should
be consulted to determine whether or not a decision should be made.
It should be noted that the cash flow statement, while important, has limited value for the
majority of students participating in the simulation. It is basically a way to check the results of
your decisions, and in the hands of experienced students, can be a potent weapon.
Income Statement
The Income Statement can be found in the same place as the Cashflow Statement, under All
Reports. The Income Statement compares revenues against expenses for a given period. The
Income Statement, along with the Balance Sheet, is the primary report for accountants. It has
limited value in the simulation, except to show net profit. The Income Statement, at its core,
shows the financial outcome of your decisions. You can see whether your decisions result in a
profit or loss, and the details for either outcome. If you do not understand the underlying
numbers that contribute to your profit or loss, consult this report. You will see if you are
spending too much in one area, or if you have room to expand spending in another to optimize
your profit.